Rental property owners can deduct building costs over 27.5 years under IRS rules, even while the property appreciates. Here’s how the math works, what passive activity rules allow, and what recapture costs you at sale.
Rental property depreciation lets you deduct the cost of a residential building over 27.5 years — a paper loss that reduces taxable rental income each year at no cash cost. The deduction comes with a catch: when you sell, the IRS recaptures those deductions at up to a 25% rate called unrecaptured Section 1250 gain, even if you forgot to claim the deduction in a prior year.
Depreciation is a non-cash deduction that lets you recover the cost of income-producing property over its useful life. The IRS recognizes that buildings wear out — even when market values rise — and allows landlords to deduct a portion of the building’s cost each year.
For residential rental property, IRS Publication 527 sets the recovery period at 27.5 years under the General Depreciation System (GDS), using straight-line depreciation. Commercial or nonresidential real property uses 39 years per IRS Publication 946.
The unusual part: you’re deducting a real dollar amount every year even as the property’s market value rises. Depreciation is a tax accounting rule, not a reflection of market conditions. Over 27.5 years, you’ll deduct the full depreciable basis of the building regardless of what it’s worth at that point.
Land doesn’t depreciate — the IRS won’t allow it because land doesn’t wear out. When you buy a rental property, you must allocate the purchase price between land and building before calculating your deduction.
Two common allocation methods: - Property tax records: The county assessor’s card typically breaks assessed value between land and improvements. Many investors apply the same ratio to their actual purchase price. - Appraisal: An independent appraiser documents the split at acquisition, providing clean support if the IRS questions the allocation later.
If you paid $300,000 total — $60,000 for land and $240,000 for the building — your depreciable basis is $240,000.
Once you have your depreciable basis, the math is straightforward:
Annual depreciation = Depreciable basis ÷ 27.5
For a $240,000 building: $240,000 ÷ 27.5 = $8,727.27 per year.
Year 1 uses the mid-month convention: regardless of the actual date you first rented the property, the IRS treats it as placed in service at the midpoint of that month. If you began renting in October, your Year 1 deduction covers 2.5 months (October 15 through December 31), not a full year.
You report annual depreciation on IRS Form 4562 (Depreciation and Amortization). Tax software handles the 4562 automatically from your entries — but verify the depreciable basis is correct, especially if prior-year depreciation was inadvertently skipped.
How you classify spending on the property determines its tax treatment:
Repairs restore the property to working condition without extending useful life. Patching a roof leak, replacing a broken appliance, repainting — these are expensed in full in the year incurred.
Capital improvements extend useful life, add value, or adapt the property to a new use. Installing central air conditioning, replacing the entire roof, adding a room — these are capitalized and depreciated separately from the original building.
The IRS Tangible Property Regulations (summarized in IRS Publication 527 for rental owners) use a “betterment, restoration, or adaptation” framework to classify expenditures. When the line is unclear, capitalizing is the conservative choice — it delays the deduction but avoids a characterization dispute.
Rental income and losses are classified as passive under Section 469 of the Internal Revenue Code. Passive losses generally can only offset passive income, not wages or ordinary business income.
The exception most individual landlords rely on: the $25,000 rental real estate special allowance. To qualify, you must:
1. Actively participate in the rental — making management decisions (approving tenants, authorizing repairs, setting rents) even if a property manager handles day-to-day tasks, AND 2. Your modified adjusted gross income (MAGI) is under $100,000.
The allowance phases out at $0.50 per dollar of MAGI between $100,000 and $150,000. Above $150,000 MAGI, it disappears entirely. Suspended rental losses carry forward indefinitely — they offset passive income in future years or the total gain when you eventually sell.
Real estate professional status removes the passive classification entirely. If more than 50% of your personal services each year are in real property businesses AND you log more than 750 hours in those activities, your rental losses are fully deductible against ordinary income with no dollar cap. IRS Publication 527 requires this status to be documented annually — a contemporaneous time log is the standard evidence.
Every depreciation deduction reduces your adjusted tax basis. When you sell, the gain — calculated against the reduced basis — includes the accumulated depreciation. The IRS recaptures those deductions through a separate tax layer.
The recaptured portion is taxed as unrecaptured Section 1250 gain: capped at 25%, separate from (and often higher than) the long-term capital gains rate that applies to the remaining appreciation.
Critical detail: recapture applies to depreciation that was “allowed or allowable” — meaning what you could have claimed, whether you actually took it or not. Missing the deduction in prior years doesn’t reduce your recapture at sale; it just means you paid more tax during those years than you needed to.
Example: You paid $300,000 for a rental ($60,000 land, $240,000 building). After 10 years, you’ve claimed $87,272 in depreciation ($8,727.27 × 10). Your adjusted basis is now $212,728. You sell for $380,000:
A 1031 like-kind exchange defers both the capital gain and recapture by rolling proceeds into a replacement property of equal or greater value. See 1031 Exchange Rules in 2026 for how the identification windows and reinvestment rules work.
The 27.5-year schedule applies to the building structure. Components with shorter MACRS recovery periods can be depreciated faster — or expensed immediately under current bonus depreciation rules.
Under the One Big Beautiful Bill Act (P.L. 119-21), 100% bonus depreciation was permanently restored for qualifying property placed in service after January 19, 2025. This applies to personal property and land improvements, not the building itself:
A cost segregation study goes further: a qualified engineer reclassifies building components that look structural but legally qualify as personal property or land improvements — specialty wiring, flooring systems, decorative elements. The front-loaded deductions improve early cash flow at the cost of higher recapture exposure later. See our Section 179 and Bonus Depreciation 2026 guide for the full OBBBA bonus depreciation framework and limits.
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This content is general financial education. It is not personalized tax advice. Consult a qualified CPA or tax advisor before making depreciation elections, planning a cost segregation study, or executing a 1031 exchange.
Under IRS Publication 527 (Residential Rental Property), residential rental property is depreciated over 27.5 years using the straight-line method under the General Depreciation System (GDS). This applies to the building only — land is never depreciable. Commercial or nonresidential real property uses a 39-year schedule per IRS Publication 946.
Generally no. Rental income and losses are classified as passive under IRS rules, and passive losses can only offset passive income. The exception: if you actively participate in managing the rental and your modified adjusted gross income (MAGI) is under $100,000, you can deduct up to $25,000 of rental losses against ordinary income. The allowance phases out at $0.50 per dollar of MAGI between $100,000 and $150,000; above $150,000, suspended losses carry forward to future years.
When you sell a rental property, the IRS taxes the portion of your gain attributable to prior depreciation at the unrecaptured Section 1250 gain rate — currently capped at 25%. This applies to depreciation that was allowed or ‘allowable,’ meaning the IRS calculates recapture as if you claimed it each year even if you didn’t. A 1031 like-kind exchange defers recapture by rolling proceeds into another qualifying property.
No. The building structure uses a 27.5-year schedule, but appliances and personal property inside a rental are typically 5-year property under MACRS, and land improvements (driveways, fencing) are 15-year property. Under the One Big Beautiful Bill Act (P.L. 119-21), qualifying 5-year and 15-year property placed in service after January 19, 2025 can be fully expensed in Year 1 through 100% bonus depreciation.
Repairs restore the property to its prior working condition and are expensed in full in the year incurred. Capital improvements extend useful life, add value, or adapt the property to a new use — they are capitalized and depreciated over their own recovery period. The IRS Tangible Property Regulations (summarized in IRS Publication 527) use a betterment, restoration, and adaptation framework to distinguish the two.